Govt cuts growth f'cast, warns on balance of trade, deficit target

NEW DELHI | By Manoj Kumar and Matthias Williams

An employee counts Indian currency notes at a cash counter inside a bank in Mumbai June 21, 2010.

Reuters/Rupak de Chowdhuri/Files

NEW DELHI India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.

Asia's third-largest economy is now expected to grow by 7.25 to 7.5 percent in the fiscal year ending next March, the government said in a mid-year review, down sharply from an estimate of 9 percent issued in February.

The slowing economy has put government finances under further stress, fueling a recent sell-off in the rupee. While tax receipts so far have lagged the budgeted estimates, expenditures are climbing at a faster clip.

"There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.

Separately, the trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160 billion from $104.4 billion a year ago, posing further downside risks to the weak Indian currency.

Slowing demand for Indian merchandise in overseas market is also making the government uncertain about achieving its annual export target of $300 billion.

"There is clear evidence of a deceleration in exports growth," said Rahul Khullar, trade secretary, after releasing the provisional trade data for November.

"There is a serious balance of trade problem."

Net tax revenues have grown at just 7.3 percent year on year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10 percent.

Adding to the gloomy outlook, the government said raising a budgeted 400 billion rupees via stake sales in state-run companies in choppy market conditions would be hard to achieve.

"There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.

With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6 percent of GDP.

The fiscal deficit has already reached nearly 74 percent of the full-year target.

Any slippage on the fiscal front is expected to force the cash-strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.

The government blamed its rising subsidy bill for higher expenditures but said it is determined to keep any slippage in the fiscal deficit target to a minimum level.

Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.

HEADWINDS

India may face its worst financial crisis in decades if it fails to stem the slide in the rupee, leaving the Reserve Bank of India (RBI) with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.

Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

Europe's festering debt crisis and worries about the U.S. economy have seen global investors pull funds from emerging markets in recent months, adding to pressure on their currencies.

The rupee is facing the brunt of this capital flight. The partially convertible currency is down nearly 17 percent against the U.S. dollar this year and is the worst performer in Asia.

The government has attributed the depreciation in rupee in part to global reallocation of funds toward safe-haven assets and has reiterated its policy of forex intervention to control volatility rather than alter the trend.

The weak rupee is confounding India's inflation management by pushing up the cost imported items. Headline inflation has been steadfast above 9 percent for the past 11 months despite 13 rate hikes by the central bank since March 2010.

The government said softening global commodity prices on slowing demand should cool inflation beginning December and slow it further to 7 percent by March.

Trending On Reuters

Markets Weekahead

With the Nifty breaching 8,500, sentiments are again bullish. But markets have been in the 8,200-8,600 range for some time and stocks across the board do not give the required confidence except for the liquidity factor. Many frontline stocks are not participating on the upside and the core sector is in a downtrend, writes Ambareesh Baliga. Column